nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2023‒04‒10
ten papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Monetary Policy and Inequality: A Two-way Relation By Luzie Thiel
  2. BEMGIE: Belgian Economy in a Macro General and International Equilibrium model By Gregory de Walque; Thomas Lejeune; Ansgar Rannenberg; Magne Mogstad
  3. Introduction à la modélisation de type Modèle d'Equilibre Général Dynamique Stochastique avec friction (MEGDS) By Andrianady, Josué R.; Rajaonarison, Njakanasandratra R.
  4. Aggregate and Distributional Effects of ‘Free’ Secondary Schooling in the Developing World By Junichi Fujimoto; David Lagakos; Mitchell VanVuren
  5. Climate change, financial intermediation, and monetary policy By Eisei Ohtaki
  6. Simple Analytics of the Government Investment Multiplier By Chunbing Cai; Jordan Roulleau-Pasdeloup
  7. Inflation and Asset Returns By Anna Cieslak; Carolin Pflueger
  8. Public-Sector Employment, Wages and Education Decisions By Chassamboulli, Andri; Gomes, Pedro Maia
  9. Longevity, Health and Housing Risks Management in Retirement By Pierre-Carl Michaud; Pascal St-Amour
  10. Public Debt and the Balance Sheet of the Private Sector By Gersbach, Hans; Rochet, Jean-Charles; von Thadden, Ernst-Ludwig

  1. By: Luzie Thiel (University of Kassel)
    Abstract: We study the transmission of monetary policy in the presence of heterogeneous households and examine the implications when the share of constrained households is a function of monetary policy. We build an analytically tractable heterogeneous agent New Keynesian model (THANK) with an endogenous share of hand-to-mouth households. The transmission of monetary policy on aggregate demand is amplified in this setup by inequality between saver and hand-to-mouth households. The amplification effect depends on monopolistic rents (enhancing) and redistribution (mitigating). Unlike most THANK models, we refrain from the assumption of a full insurance steady state.
    Keywords: Monetary Policy, Heterogeneous Households, Inequality, Aggregate Demand, Complementarity, Financial Conditions, Imperfect Insurance
    JEL: E12 E21 E44 E52 E58
    Date: 2023
  2. By: Gregory de Walque (Economics and Research Department, National Bank of Belgium); Thomas Lejeune (Economics and Research Department, National Bank of Belgium); Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium); Magne Mogstad (Economics and Research Department, National Bank of Belgium)
    Abstract: This paper outlines the three-country New Keynesian Dynamic Stochastic General Equilibrium model of the National Bank of Belgium. The model is named BEMGIE for Belgian Economy in a Macro General and International Equilibrium model. It features imperfect market competition, standard real and nominal rigidities, local currency pricing, energy in consumption and oil and foreign inputs in production. The model is estimated using Bayesian econometric techniques on Belgian, euro area and US data. BEMGIE is designed to provide quantitative simulations of macroeconomic shocks and policies, and to be used in the context of the Eurosystem projection exercises.
    Keywords: production networks, endogenous formation, fixed costsDSGE model, Open economy model, Multi-country model, International spillovers, Monetary policy, Exchange rate pass-through, Bayesian estimation.
    JEL: E10 E17 E30 E40 E52 F41 F45 F47 C11 C32 C51
    Date: 2023–03
  3. By: Andrianady, Josué R.; Rajaonarison, Njakanasandratra R.
    Abstract: The objective of this working paper is to provide an introduction to the Dynamic Stochastic General Equilibrium Model with Friction (DSGE). A simple model that is based on theoretical achievements from the literature. The model is composed of three (3) agents who meet on the market and the economy is assumed to be open, i.e. having relations with the rest of the world.
    Keywords: DSGE, dynamic stochastic general equilibrium model, friction
    JEL: A10 C61
    Date: 2023–03–13
  4. By: Junichi Fujimoto; David Lagakos; Mitchell VanVuren
    Abstract: This paper analyzes the aggregate and distributional effects of publicly funded merit-based (‘free’) secondary schooling in the developing world. Our analysis is based on an overlapping-generations model of human capital accumulation in which households face borrowing constraints that can lead to misallocation of talent in equilibrium. We estimate the model to match a randomized controlled trial that provided poor but talented children in Ghana with scholarships for secondary education. The model predicts that a nationwide free secondary schooling policy is largely redistributive in nature, with modest gains in GDP and average welfare. Policies that spend the same amount on improving education quality result in larger welfare gains for households of all income levels
    JEL: E24 O11
    Date: 2023–03
  5. By: Eisei Ohtaki
    Abstract: Motivated by recent climate actions of central banks and supervisors, this study aims to explore implications of climate change in an economy with financial intermediaries. For this aim, this study develops an overlapping generations model of the environment and financial intermediation. In that model, reactions of financial intermediaries, the monetary steady state, and optimal monetary policy against climate change are studied. Especially, it is demonstrated that the level of the optimal money growth rate depends on how "green" agents are.
    Date: 2023–03
  6. By: Chunbing Cai; Jordan Roulleau-Pasdeloup
    Abstract: What are the effects of investing in public infrastructure? We answer this question with a New Keynesian model. We recast the model as a Markov chain and develop a general solution method that nests existing ones inside and outside the lower bound as special cases. Our framework delivers a simple expression for the contribution of public infrastructure. We show that it provides a unified framework to study the effects of public investment in three scenarios: $(i)$ normal times $(ii)$ a short-lived liquidity trap $(iii)$ a long-lived liquidity trap. We also provide closed-form results for intermediate cases with a liquidity trap of arbitrary duration.
    Date: 2023–02
  7. By: Anna Cieslak; Carolin Pflueger
    Abstract: The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using in a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to supply shocks driving the economy. We then discuss asset pricing implications of “good” and “bad” inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation.
    JEL: E0 E31 G1 G12
    Date: 2023–03
  8. By: Chassamboulli, Andri (University of Cyprus); Gomes, Pedro Maia (Birkbeck, University of London)
    Abstract: We set up a search and matching model with a private and a public sector to understand the effects of employment and wage policies in the public sector on unemployment and education decisions. The effects on the educational composition of the labor force depend crucially on the structure of the labor market. An increase of skilled public-sector wages has a small positive impact on educational composition and larger negative impact on the private employment of skilled workers, if the two sectors are segmented. If there are movements across the two sectors, it has large positive impacts on education and on skilled private employment. We highlight the usefulness of the model for policymakers by calculating the value of public-sector job security for skilled and unskilled workers.
    Keywords: public-sector employment, public-sector wages, unemployment, skilled workers, education decision, public-sector job security premium
    JEL: E24 J31 J45 J64
    Date: 2023–03
  9. By: Pierre-Carl Michaud; Pascal St-Amour
    Abstract: Annuities, long-term care insurance and reverse mortgages remain unpopular to manage longevity, medical and housing price risks after retirement. We analyze low demand using a life-cycle model structurally estimated with a unique stated-preference survey experiment of Canadian households. Low risk aversion, substitution between housing and consumption and low marginal utility when in poor health explain most of the reduced demand. Bequests motives are found to be a luxury good and play a limited role. The remaining disinterest is explained by information frictions and behavioural status-quo biases. We find evidence of strong spousal co-insurance motives motivating LTCI and of responsiveness to bundling with a near doubling of demand for annuities when reverse mortgages can be used to annuitize, instead of consuming home equity.
    Keywords: retirement wealth; insurance; health risk; housing risk
    JEL: J14 G52 G53
    Date: 2023
  10. By: Gersbach, Hans; Rochet, Jean-Charles; von Thadden, Ernst-Ludwig
    Abstract: This paper studies the impact of corporate political influence on fiscal policy. We in-troduce different interest groups, firms and households, into a simple growth model with incomplete markets and heterogeneous agents. Firms face non-insurable id-iosyncratic productivity shocks. They finance their productive investments by issu-ing bonds but cannot issue equity. Households’ savings are invested into corporate bonds and public debt. The government selects the levels of taxes and public debt so as to maximize a weighted sum of the welfares of firms’owners and households. More government debt reduces corporate leverage, increases the risk free rate r and decreases the growth rate g. A. The weight of firms in social welfare determines whether r g at the optimum, with different dynamics in both regimes.
    Keywords: Incomplete Financial Markets; Debt, Interest; Growth; Ponzi Games; Heterogeneous Agents
    JEL: E44 E62
    Date: 2023–03–03

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